Saturday, August 23, 2008

Reliance Power - Stock Analysis

To start with, NTPC has a current installed capacity of about 28,000 mw, close to what RPL proposes to achieve in the next eight years.After years of inefficiency, the power sector is finally in the thick of action. Significant capacity addition is underway or being planned. After the award of ultra mega power projects (UMPP), which provide enough incentives for efficiency, things are moving faster. Apart from Reliance Power, other companies are also undertaking significant capacity addition. While NTPC is expanding capacity by 22,000 mw by FY12 (of which, 13,360 mw is already under construction),Neyveli Lignite is developing projects totalling 3,750 mw. Similarly, Tata Power is developing projects totalling around 5,500 mw, the biggest of which is the 4,000-mw Mundra project, for which major equipment has been ordered.Reliance power plans to develop 13 projects, with total capacity of 28,200 mw. Of the total capacity, around 10,300 mw is gas-based, 3,300 mw is hydel and the remaining is coal-based. Of the coal-based projects, two projects with about 8,000 mw of capacity have been won through competitive bidding.The company has applied for an additional fuel linkage of around 4.7 mtpa for another 600-mw project and to run the plant at more than 80% plant load factor (PLF).

Apart from this, the Sasan UMMP has assured fuel linkage, which should help Reliance Power accelerate the implementation process. Apart from the execution capability of the group, Reliance Power can derive some advantage through REL’s EPC division, which has an experience in developing power projects and had an order book of Rs 5,525 crore as on March 31, ’07. This should also provide some additional saving in project costs.Among the major downsides related to power projects are the risks of financing and execution, fuel linkages, offtake and credit risk (risk of payment from customers).While financing and offtake risks are low, fuel linkages and credit risks are moderate. But there is significant execution risk attached with these projects, which are supposed to be implemented against a stiff timeline. On an overall basis, the company should be able to meet the expectations of shareholders, though the gestation period should be factored in.I have been bearish on reliance power since ipo time and the scrip acted as far my expectation and is presently quoting at a significant discount to its ipo price(bonus adjusted).

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